February 25

No easy financial bailout plan for Ukraine

The currency is sliding, banks are fragile and a rescue with outside lenders can’t be agreed until there’s a government.

By David Mchugh And Juergen Baetz
The Associated Press

KIEV, Ukraine – Ukraine needs money, and fast – in weeks, not months. But bailing out the country of 46 million people will not be as easy as simply writing a big check.

click image to enlarge

A woman reacts at a memorial for the people killed in clashes with the police at Kiev’s Independence Square, the epicenter of the country’s current unrest, Ukraine, Tuesday, Feb. 25, 2014.

The Associated Press

For one, Ukraine has already burned the main global financial rescuer, the International Monetary Fund, by failing to keep to the terms of earlier bailouts from 2008 and 2010.

Now it needs help again, and its economic and financial problems are worse than before.

The currency is sliding, raising concerns that companies that owe money in foreign currency could go bust. Banks are fragile. A rescue with outside lenders can’t be agreed until there’s a government. And Russia could make things worse by demanding payment of money owed for natural gas supplies.

Even with a bailout, the country would face testing times. It would likely be asked to make painful reforms – including a potential doubling in the price of gas – that would hurt standards of living as the economy recovers.

HOW MUCH?

Analysts estimate the country will need between $20 billion and $25 billion for 2014 and 2015, perhaps $15 billion this year and $10 billion the next. The money would help pay salaries and pensions and maturing bonds. Acting President Oleksandr Turchynov says the treasury account used to pay bills is almost empty.

Ukraine’s acting finance minister, Yuri Kobolov, says the country needs $35 billion to cover this year and next and expressed hope that Europe or the United States would help, hopefully within the next two weeks. Ukraine has major debt repayments coming up in June but analysts indicate it probably won’t make it that far without help.

The Institute of International Finance, a Washington-based association of banks and financial companies, warned that Ukraine’s finances “are on the verge of collapse.”

“It’s crunch time for the economy,” said Lilit Gevorgyan, an analyst with IHS Global Insight in London. “All those issues they have swept under the rug are re-emerging.”

FROM WHERE?

The main rescue lender would be the IMF, but it could take time for it to formally agree on the bailout conditions. Until then, it is likely to get temporary support from individual countries in Europe or the U.S.

EU foreign policy chief Catherine Ashton said Tuesday that the EU and its member nations are ready to help bridge Ukraine’s short-term financing needs until a new government can negotiate a full-fledged assistance package with the IMF.

“Bills have to be paid,” she said, adding that it is important that Russia also help out.

Ukraine had a promise of $15 billion in help from Russia – but that’s on hold after parliament voted Saturday to remove pro-Russian President Viktor Yanukovych. The country only got $3 billion of the money before President Viktor Yanukovych was voted out.

EXISTING PROBLEMS

Ukraine is battling to keep its currency, the hryvnia, from collapsing, which would bring down banks and companies that owe money in foreign currencies.

The central bank spent some $2.8 billion of its reserves since the start of the start of the year and has only about $16 billion left. Still the hryvnia has fallen a sharp 12 percent during that period.

The government also spends way more than it takes in, largely because the state-owned gas company Naftogaz charges customers as little as one-fifth the cost of gas imported from Russia. The IMF halted payouts under earlier bailouts because the government refused to halt that practice.

The economy is estimated to be in a deepening recession, with industrial production, consumer spending and exports all dropping.

BAILOUT CONDITIONS

(Continued on page 2)

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